Objective. Objective 4/13/2015. Resume. Why am I Speaking to You Today? Legal and Practical Issues for Buyers and Sellers

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1 Blueprint for a Successful Transition: American Association of Orthodontists 115th Annual Session Practice Transition Seminar San Francisco 2015 Blueprint for a Successful Transition Robert Gallagher, Roger Levin, Jonathan Martin, Scott McDonald, Eric Ploumis Legal and Practical Issues for Buyers and Sellers Presented by: Eric J. Ploumis, D.M.D., J.D. 453 Second Avenue New York, NY DentalPracticeLawyers.com 1 Resume Amherst College, 1979 U. of Pittsburgh Dental, 1983 Fairleigh Dickenson U., Ortho., 1985 Pace Law, 1990 Associate Professor, NYU Dept. of Orthodontics, 1989 present Private practice of orthodontics, Brooklyn Private practice of law, Manhattan Why am I Speaking to You Today? To explore legal issues in a transition from both the buyer s and seller s perspective To answer some of your questions about the legal issues of a practice transition To join my distinguished colleagues in a forum on practice transitions 3 4 This presentation is designed to give both buyers and sellers a brief overview of some of the legal issues to consider when transitioning into or out of an orthodontic practice. We will review the legal documents your transition might require

2 Life Cycle of a Transition 3. Associate buys in We will review what you attorney should do for you and what you should expect from your attorney. 2. Hire an associate 4. Associate buys out senior doctor 7 1. Putting together your transition team 5. Senior doctor becomes the associate 8 Why would you be offered a job by a senior doctor? What should you be careful of when evaluating an offer? Excessive patient load Desire to reduce workload Transition imminent Professional companionship Expectation of growth Desire to keep all procedures in house Locked-in buyer Better utilization of overhead 9 10 Associates, you have two functions in the office: Make your employer s life easier Make money for your employer Seller s Transition Team Accountant Attorney Financial Planner Practice Broker Transition Consultant Spouse Buyer s Transition Team Accountant Attorney Finance Source Practice Broker Transition Consultant Insurance Broker Spouse

3 Attorney s Role Evaluates: legal issues, employment issues, legal structure of practice, documents advisor negotiator document drafter document reviewer Legal Considerations Things to consider and have in place when contemplating a transition Seller s Entity Status Seller s Employment by Corporation C or S corporation? If a C corp, consider switching to S status 10 years prior to transition. C corp makes a transition more difficult due to tax consequences for both parties If you are a C corp and have an employment contract with your corporation, resign from corporation at least a year prior to sale. This will help ensure the goodwill value is personal to you and not a corporate asset Buyer s Entity Status Lease Issues: Buyer and Seller In conjunction with your accountant, choose the appropriate entity: Sole Proprietor Professional Corporation (s-corp election) Professional Limited Liability Company Pay careful attention to your lease years in advance. Negotiate hard. Put your lease where you can find it. READ THE LEASE You must have at least five to seven years left on your lease when you are ready to sell. Buyer cannot get financing without a lease of this duration

4 Lease Issues Lease Issues Never assume the landlord will cooperate even if he is your patient, friend or brother Make absolutely sure you can assign and sublet to your buyer. Key words in lease are such consent shall not be unreasonably withheld, conditioned or delayed. Practice purchase agreement must have a lease contingency Seller: do not assign your lease unless you close Buyer: do not close unless the lease is assigned to you. Buyer: if office is owned by seller, get an exclusive even if you vacate the space Lease Zingers right of landlord to recapture space large assignment commission to landlord unobtainable standards for assignment time is of the essence clauses costly holdover rates failure to get an exclusive for ortho office failure of landlord to release seller Lease to Own fair market value rent fair market value purchase price right of first refusal vs. option to purchase 21 Seller: Restrictive Covenants Make sure all associates have employment contracts with restrictive covenants Never hire an associate with the idea you will prepare a contract later Lack of restrictive covenant will hurt practice marketability Buyer: Restrictive Covenants Restrictive covenants are enforceable: don t sign one if you don t intend to adhere to it. Be careful about a bait and switch restrictive covenant. You will be asked to sign a restrictive covenant: look for creative solutions to difficult issues

5 Financial Policy, Accounts Receivable Tighten up your financial policies at least a year in advance. Make an effort to collect your accounts receivable at least six months in advance. This may be money left on the table after the transition. Buyer does not want to collect your a/r. Once you sell, you will not be in a strong position to collect them yourself. Practice Liens and Loans Review and begin to pay off any outstanding debt on practice. Do not enter into any long-term leases or contracts. The buyer may not want to assume these and you may have to absorb them. examples include: yellow page ad, digital x- ray/cbct, postage meter, water cooler, laundry service, sharps pick-up, alarm system, software maintenance Practice Statistics: Charts and Computer Entries Be diligent about entering computer stats Inaccurate stats present an incomplete picture of the practice. Improve your charting. Take progress records. Buyer will do a chart audit. Do not be offended or defensive. Neat charts improve value and buyer confidence. Pre-Sale Patient Management and Care Start treatment on any patient who is ready to begin. Increase your initial fee and make sure patients adhere to your fee schedule. Avoid excessive prepayments and excessive use of third-party financing. Avoid a last minute fire sale on treatment. Buyer s can spot that and will look unfavorably on it Tax Returns/Financial Data Post-Transition Employment Clean up your books. Slow down on the personal deductions to show more income. Report cash in the unlikely event you haven t been. Have tax returns and P&L ready for buyer. Work with your accountant to have all the financial data ready for buyer. 29 Does seller want to work for buyer? Does buyer want to employ seller? If yes, how much and in what capacity? As an independent contractor or an employee? Will Seller close P.C. or have P.C. work for buyer? Seller: how you treat buyer will be how buyer will treat you. 30 5

6 Personal and Financial Issues/ Seller Can I afford to retire? Am I burned out? Do I have something else I would rather be doing? Is my spouse on-board with the sale? (For better or worse, but not for lunch.) Personal and Financial Issues/ Buyer Know seller s answers to the previous questions and ask yourself: Can I afford this practice? Do I need to work somewhere else? Am I ready to run a practice? Is my spouse as excited as I am? Tax Issues in a Transition There are three parties to every transition: Seller Buyer IRS Tax Issues in a Transition goodwill accounts receivable, contracts receivable restrictive covenants fixed (tangible) assets supplies and instruments leasehold improvements stock transfer best for seller Goodwill buyer: straight-line 15 year amortization seller: capital gain for unincorporated, S-corp, LLC double tax if C corp 35% corp tax plus personal income tax rate Restrictive Covenants allocation unfavorable to both parties buyer: straight-line 15 year amortization seller: ordinary income (If restrictive covenants are merged into goodwill, capital gains treatment is possible.)

7 Fixed (Tangible) Assets dental and office equipment, furniture, fixtures good for buyer buyer: depreciates annually according to schedule, 5 7 years (Section 179) $25,000/yr buyer may pay sales tax on value of assets seller: ordinary income Supplies and Instruments great for buyer buyer: immediately deductible no sales tax seller: ordinary income Leasehold Improvements Allocation of Purchase Price so-so for buyer up to 39 years to depreciate Make sure you can support the allocations in your agreements Get your accountant involved 39 Stock Sale Great for seller, terrible for buyer. Buyer: no deduction, becomes basis Buyer: inherits all of corporation s liabilities Seller: capital gain above basis Fractional (Stock) Buy-In Limited value assigned to stock in a fractional buy-in to reduce unfavorable tax outcome to purchaser (depreciated value of assets) Income shift, buyer to seller offset (increase) in purchase price Personal goodwill of seller May be the only way to buy in to a group practice

8 Psychological Issues Seller s Concerns Our topic: Presenting Value, Perceiving Value: Understanding practice transitions from the perspective of both buyer and seller. Buyer s Concerns 43 Seller Your practice is probably not worth 1x gross despite how great you feel it is You probably aren t worth $1,500/day despite how great you think you are Don t stay too long, sell while your practice still has real value Even though you just hung out a shingle and did well, it is a different environment today. Are you sure you can live on what you have left? Buyer Seller s practice is worth more than 25% of gross despite how antiquated you feel the physical plant is Somehow, seller managed to make a great living with that dowdy old office You probably aren t worth $1,500/day despite how great you think you are It will take you a year or two to realize you don t know everything Are you sure you can live on what you have left? Associates, you have two functions in the office: Inter-family Transitions Make your employer s life easier Make money for your employer every parent s dream fraught with emotion dependent upon having a large practice challenging with divorced families complex tax issues 47 8

9 You are ready to move ahead. What documents will you need? Formal Document Drafting asset, stock, or interest purchase agreement new lease or lease assignment and assumption employment agreement for seller consulting agreement for seller deferred compensation agreement for seller stock purchase agreement stock pledge agreement goodwill assignment agreement restrictive covenants partnership agreements/ partnership dissolution agreements promissory note bill of sale security agreement escrow agreement lien search/title search 50 Formal Document Drafting letter of intent parties negotiate issues formal documents are drawn up, usually by seller s attorney documents can be drawn up by broker, consultant or buyer s attorney other attorney reviews and comments Sailing to Iceland America s Cup 2014 Why am I Speaking to You Today? To explore legal issues from both the buyer s and seller s perspective To answer some of your questions about the legal aspects of a practice transition To join my distinguished colleagues in a forum on practice transitions

10 This presentation is designed to give both buyers and sellers a brief overview of some of the legal issues to consider when transitioning into or out of an orthodontic practice. We will review the legal documents your transition might require Make an Investment We will review what you attorney should do for you and what you should expect from your attorney. 57 Disclaimer This information is not intended at a substitute for legal advice. You should familiarize yourself with the laws of your local jurisdiction and seek legal advice from a local attorney who specializes in such matters

11 American Association of Orthodontists 115th Annual Session Practice Transition Seminar San Francisco 2015 Eric J. Ploumis, D.M.D., J.D. 453 Second Avenue New York, NY